SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_________________.
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
- --------------------------------------------------------------------------------
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 758-2424
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [ X ] NO [ ]
Number of shares of Class B Common Stock outstanding as of September 30, 1997:
4,924,474. (Does not include 9,220,278 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
Part I - Financial Information
Page
Item 1. Consolidated Financial Statements ............................. 3
Consolidated Statement of Financial Condition as of
September 30, 1997 (Unaudited) and December 31, 1996.. 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited).. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) ........ 7
Notes to Unaudited Consolidated Financial Statements .......... 10
Item 2. Management's Discussion and Analysis........................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 21
Part II - Other Information
Item 1. Legal Proceedings ............................................. 22
Item 2. Changes in Securities ......................................... 22
Item 3. Defaults upon Senior Securities ............................... 22
Item 4. Submission of Matters to a Vote of Security Holders ........... 22
Item 5. Other Information ............................................. 22
Item 6. Exhibits and Reports on Form 8-K .............................. 22
Signatures ............................................................... 23
2
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, December 31,
1997 1996
----------- ----------
(Unaudited)
($ in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks........................................... $ 27,385 $ 31,990
Money market investments:
Securities purchased under agreements to resell.............. 7,502 19,633
Time deposits with other banks............................... 50,560 33,233
Federal funds sold........................................... --- 14,000
Mortgage loans held for sale, at lower of cost or market.......... 112,149 54,450
Mortgage-backed securities held for trading, at fair value........ 322,674 108,146
Mortgage-backed securities available for sale, at fair value...... 46,415 50,841
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1997 - $34,478; 1996 - $37,104).......... 34,643 37,900
Investment securities held for trading, at fair value............. 1,335 1,351
Investment securities available for sale, at fair value........... 69,451 30,973
Investment securities held to maturity, at amortized cost
(estimated market value: 1997 - 5,261; 1996 - $5,241)............. 5,273 5,270
Loans receivable, net............................................. 692,045 603,751
Accounts receivable, including advances to investors, net......... 6,111 5,764
Accrued interest receivable....................................... 9,274 6,632
Mortgage servicing rights......................................... 17,782 12,595
Excess servicing receivable....................................... --- 770
Premises and equipment............................................ 8,882 7,768
Other assets...................................................... 11,203 12,730
----------- ----------
$ 1,422,683 $1,037,797
=========== ==========
</TABLE>
(Continued)
3
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
(Unaudited)
($ in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................................................ $ 702,519 $ 615,567
Securities sold under agreements to repurchase .......................................... 332,678 97,444
Federal funds purchased ................................................................. -- --
Notes Payable ........................................................................... 156,665 126,842
Advances from FHLB ...................................................................... 42,200 15,000
Other secured borrowings ................................................................ 37,148 50,463
Accounts payable and accrued liabilities: ............................................... 14,032 9,999
Other liabilities ....................................................................... 3,050 3,599
----------- -----------
1,288,292 918,914
----------- -----------
Subordinated notes ............................................................................. 3,250 3,250
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding -- --
Common stock:
Class A - $.01 par value, 10,000,000 shares authorized, 9,220,278 shares issued and
outstanding in 1997 (1996 - 5,122,377) ......................................... 92 51
Class B - $.01 par value, 15,000,000 shares authorized, 4,924,474 shares issued and
outstanding in 1997 (1996 -2,735,839) .......................................... 49 27
Additional paid-in capital .............................................................. 38,348 38,411
Retained earnings ....................................................................... 90,499 75,785
Capital reserves of the Bank ............................................................ 1,461 1,461
Unrealized gain (loss) on securities available for sale ................................. 692 (102)
----------- -----------
131,141 115,633
----------- -----------
$ 1,422,683 $ 1,037,797
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Nine month
period ended period ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest Income:
Loans .............................................. $ 18,859 $ 14,504 $ 50,818 $ 39,874
Money market and other investments ................. 1,295 1,087 4,024 2,892
Mortgage-backed securities ......................... 6,059 3,868 14,543 11,038
-------- -------- -------- --------
Total interest income .......................... 26,213 19,459 69,385 53,804
-------- -------- -------- --------
Interest expense:
Deposits ........................................... 8,363 7,010 24,131 20,054
Securities sold under agreements to repurchase ..... 3,936 1,362 7,754 3,946
Notes payable ...................................... 2,573 1,823 6,985 4,785
Secured borrowings ................................. 936 1,038 2,869 3,178
Other .............................................. 619 457 1,216 626
--------- -------- -------- --------
Total interest expense ....................... 16,427 11,690 42,955 32,589
--------- -------- -------- --------
Net interest income ..................................... 9,786 7,769 26,430 21,215
Provision for loan losses ............................... (1,700) (2,484) (4,645) (2,841)
--------- -------- -------- --------
Net interest income after provision for loan losses ..... 8,086 5,285 21,785 18,374
--------- -------- -------- --------
Other income:
Net gain on origination and sale of loans ......... 4,511 4,584 13,170 7,955
Net profit (loss) on trading account .............. (386) (386) (744) 201
Net gain on sales of investments available for sale 31 -- 56 329
Loan administration and servicing fees ............ 2,895 3,128 9,738 9,625
Service charges, fees and other ................... 1,278 1,113 3,488 2,932
--------- -------- -------- --------
8,329 8,439 25,708 21,042
--------- -------- -------- --------
Total Revenues ............................... 16,415 13,724 47,493 39,416
--------- -------- -------- --------
</TABLE>
(Continued)
5
<PAGE>
<TABLE>
<CAPTION>
Three month Nine month
period ended period ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Employee compensation and benefits ........ 2,489 2,966 7,645 8,169
Office occupancy and equipment ............ 1,902 1,163 5,521 4,058
SAIF one-time assessment .................. -- 2,508 -- 2,508
Other administrative and general .......... 3,622 3,382 10,739 10,650
8,013 10,019 23,905 25,385
Income before minority interest and income taxes 8,402 3,705 23,588 14,031
Minority interest in the Bank .................. -- 9 -- 418
Income before income taxes ..................... 8,402 3,696 23,588 13,613
Income tax expense (credit):
Current ................................... 1,067 1,615 3,893 6,389
Deferred .................................. 1,284 (386) 3,231 (1,338)
2,351 1,229 7,124 5,051
Net income .............................. $ 6,051 $ 2,467 $ 16,464 $ 8,562
========== ========== =========== ==========
Eamings per common share ....................... $ 0.43 $ 0.22 $ 1.16 $ 0.86
========== ========== =========== ==========
Weighted average number of shares outstanding .. 14,144,752 11,193,720 14,144,752 9,962,578
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month
period ended
September 30,
------------------------
1997 1996
--------- ---------
(Unaudited)
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................................... $ 16,464 $ 8,562
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................................... 2,013 1,500
Amortization of premium (accretion of discount) on investments and mortgage- backed securities, net (346) 204
Amortization of deferred loan origination fees and accretion of discount on loans .................. (375) (389)
Amortization of excess servicing receivable ........................................................ -- 58
Amortization of servicing rights ................................................................... 1,261 908
Provision for loan losses .......................................................................... 4,645 2,841
Provision for bad debts in accounts receivable ..................................................... 225 225
Gain on sales of mortgage loans .................................................................... (1,208) (856)
Gain on sales of investment securities available for sale .......................................... (56) (329)
Unrealized (profit) loss on trading securities ..................................................... (8,479) (53)
Minority interest in earnings of the Bank .......................................................... -- 418
(Increase) decrease in mortgage loans held for sale ................................................. (57,699) 4,319
Net increase in mortgage-backed securities held for trading ........................................ (205,278) (36,060)
Increase in receivables ............................................................................ (3,215) (2,075)
Decrease (increase) in other assets ................................................................ 1,441 (4,700)
Increase in notes payable .......................................................................... 32,223 2,776
Increase (decrease) in accounts payable and accrued liabilities .................................... 3,670 (293)
(Decrease) increase in other liabilities ........................................................... (549) 2,594
---------
Total adjustments ........................................................................... (231,727) (28,912)
--------- ---------
Net cash used in operating activities ....................................................... (215,263) (20,350)
--------- ---------
</TABLE>
(Continued)
7
<PAGE>
<TABLE>
<CAPTION>
Nine month
period ended
September 30,
--------------------------
1997 1996
---------- ----------
(Unaudited)
($ in thousands)
<S> <C> <C>
Cash flows for investing activities:
Purchases of investment securities .......................................... (61,825) (49,064)
Proceeds from maturities of investment securities held to maturity .......... 100 377
Proceeds from sale and maturities of investment securities available for sale 25,403 22,013
Proceeds from sale and maturities of investment securities held for trading . 1,400 400
Principal repayments on mortgage-backed securities .......................... 6,503 6,152
Proceeds from sales of loans ............................................... 55,607 49,373
Net originations of loans ................................................... (146,963) (184,014)
Purchases of FHLB stock, net ................................................ (659) (968)
Acquisition of premises and equipment ....................................... (2,740) (1,813)
Net increase in foreclosed real estate ...................................... (302) (511)
Acquisition of servicing rights ............................................. (6,448) (4,046)
---------- ----------
Net cash used in investing activities ................................. (129,924) (162,101)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable ..................................... -- 60,500
Payments on long-term debt .................................................. -- (5,324)
Increase in deposits - net .................................................. 86,808 77,192
Increase in securities sold under agreements to repurchase - net ........... 235,234 (28,757)
Payments on notes payable ................................................... (2,400) --
Payments on secured borrowings .............................................. (13,315) (3,589)
Advances from FHLB .......................................................... 151,700 6,000
Repayment of advances from FHLB ............................................. (124,500) (7,000)
Proceeds from issuance of common stock in initial public offering ........... -- 31,073
Payment of cash in lieu of fractional shares on stock split ................. (11) --
</TABLE>
(Continued)
8
<PAGE>
<TABLE>
<CAPTION>
Nine month
period ended
September 30,
------------------------
1997 1996
--------- ---------
(Unaudited)
($ in thousands)
<S> <C> <C>
Cash dividends on common stock .......................... (1,739) (500)
--------- ---------
Net cash provided by financing activities ............... 331,777 187,109
--------- ---------
Net (decrease) increase in cash and cash equivalents (13,410) 4,658
Cash and cash equivalents at beginning of period ... 98,856 104,195
--------- ---------
Cash and cash equivalents at end of period ......... $ 85,446 $ 108,853
========= =========
Cash and cash equivalents include:
Cash and due from banks ............................ $ 27,386 $ 24,800
Securities purchased under agreements to resell .... 7,501 19,582
Time deposits with other banks ..................... 50,559 64,471
--------- ---------
$ 85,446 $ 108,853
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- REPORTING ENTITY AND BASIS OF PRESENTATION
Reporting entity
The accompanying unaudited consolidated financial statements of R&G
Financial Corporation (the "Company") include the accounts of R&G Mortgage Corp.
("R&G Mortgage"), a Puerto Rico corporation, and R-G Premier Bank of Puerto Rico
(the "Bank"), a commercial bank chartered under the laws of the Commonwealth of
Puerto Rico. The Company was formed in March 1996 for the sole purpose of
becoming the parent corporation and sole stockholder of R&G Mortgage and the
Bank. During 1996, the Company acquired a 100% ownership interest in the Bank
and R&G Mortgage. See Note 1 to R&G Financial's Consolidated Financial
Statements for the year ended December 31, 1996.
R&G Mortgage is engaged primarily in the business of originating
FHA-insured, VA guaranteed, and privately insured first and second mortgage
loans on residential real estate. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.
The Bank provides a full range of banking services, including
residential, commercial and personal loans and a diversified range of deposit
products through fifteen branches located mainly in the northern part of the
Commonwealth of Puerto Rico. The Bank also provides private banking and trust
and other financial services to its customers. The Bank is subject to the
regulations of certain federal and Puerto Rico agencies, and undergoes periodic
examinations by those regulatory agencies.
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of September 30, 1997 and the results of
operations and changes in its cash flows for the three and nine month periods
ended September 30, 1997 and 1996.
10
<PAGE>
The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the year ending December 31, 1997. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1996.
Certain reclassifications (not affecting income before income taxes or net
income) have been made to the consolidated statements of income for the quarter
and nine month periods ended September 30, 1996 to conform to the presentation
for the quarter and nine month periods ended September 30, 1997.
Basis of consolidation
All significant inter-company balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Stock option plans
The pro-forma net income and earnings per share disclosures for the
three and nine month periods ended September 30, 1997 and 1996 required by SFAS
No. 123 - "Accounting for Stock-Based Compensation," as if compensation cost had
been determined based on the fair value at the grant date for awards made under
the Company's Stock Option Plan, have not been made because the effects on net
income and earnings per share of compensation costs so determined are not
significant.
NOTE 2 - EARNINGS PER SHARE
Primary earnings per common share for the three and nine month periods
ended September 30, 1997 and 1996 were computed by dividing net income for such
periods by the weighted average number of shares of common stock outstanding
during such periods, which was 14,144,752 shares for the three and nine month
periods ended September 30, 1997, and 11,193,720 and 9,962,578 for the three and
nine month periods ended September 30, 1996, respectively. The increase in the
weighted average number of shares outstanding reflects an 80% stock split paid
by the Company in September 1997. Per share information for all periods
presented take into consideration the 80% stock split paid by the Company in
September 1997.
Outstanding stock options granted in connection with the Company's
Stock Option Plan were excluded from the weighted average number of shares
because their dilutive effect is not significant.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.
11
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------
Amortized cost Fair value
(Unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year ..................................... $ 309,771 $ 310,403
----------- -----------
Puerto Rico Government obligations:
Due within one year ..................................... 1,000,000 1,000,500
Due from five to ten years .............................. 529,568 487,500
Due over ten years ...................................... 42,022 42,022
----------- -----------
1,571,590 1,530,022
----------- -----------
Corporate securities -
Due within one year ..................................... 3,391,771 3,420,483
----------- -----------
$ 5,273,132 $ 5,260,908
=========== ===========
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from one to five years .............................. $ 52,587 $ 53,419
Due over ten years ...................................... 19,277,130 18,627,824
----------- -----------
19,329,717 18,681,243
Federal National Mortgage Association (FNMA) certificates -
Due over ten years ...................................... 15,021,768 15,519,976
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC) certificates -
Due over ten years ...................................... 291,350 276,380
----------- -----------
$34,642,835 $34,477,599
=========== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
---------------------------
Amortized cost Fair value
---------------------------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 7,021,610 $ 8,396,982
----------- -----------
FNMA certificates:
Due over ten years .......................... 9,921,540 9,848,925
----------- -----------
FHLMC certificates:
Due from one to five years .................. 49,439 49,301
Due from five to ten years .................. 379,570 390,748
Due over ten years .......................... 27,897,878 27,728,726
----------- -----------
28,326,887 28,168,775
----------- -----------
$45,270,037 $46,414,682
=========== ===========
Investment securities available for sale:
U.S. Treasury securities:
Due from one to five years .................. $30,036,283 $30,134,143
----------- -----------
U.S. Government and agencies securities:
Due from one to five years .................. 29,495,921 29,455,037
Due from five to ten years .................. 5,023,620 4,955,605
----------- -----------
34,519,541 34,410,642
----------- -----------
FHLB stock ....................................... 4,906,067 4,906,067
----------- -----------
$69,461,891 $69,450,852
=========== ===========
</TABLE>
Mortgage-backed securities available for sale include interest only
securities with an amortized cost of $2.4 million as of September 30, 1997,
which are associated with the sale in prior years of collaterized mortgage
obligations (CMO'S). These sales were not made in connection with the Company's
mortgage banking activities.
The interest rate risk on the above mortgage-backed securities
available for sale (excluding CMOs) are being hedged with options and financial
futures contracts based on U.S. Treasury securities and Eurodollars. At
September 30, 1997, no futures or option contracts were outstanding for hedging
purposes.
13
<PAGE>
<TABLE>
<CAPTION>
September 30,
1997
-------------
(Unaudited)
<S> <C>
Mortgage-backed securities held for trading:
CMO Certificates.................................. $ 15,228,000
CMO Residuals (all interest only)................. 8,382,756
GNMA Certificates................................. 299,063,090
------------
$322,673,846
============
</TABLE>
14
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
September 30,
1997
-------------
(Unaudited)
<S> <C>
Real estate loans:
Residential - first mortgage.................... $421,561,510
Residential - second mortgage................... 17,143,042
Construction.................................... 11,262,757
Commercial...................................... 82,133,808
------------
532,101,117
Undisbursed portion of loans in process.............. (5,718,469)
Net deferred loan fees............................... 387,790
------------
526,770,438
Other loans:
Commercial...................................... 35,404,367
Consumer:
Secured by deposits.......................... 11,788,556
Secured by real estate....................... 68,154,293
Other........................................ 54,835,652
Unamortized discount................................. (177,072)
Unearned interest.................................... (409,954)
------------
169,595,842
Total loans.................................. 696,366,280
Allowance for loan losses....................... (4,321,649)
$692,044,631
============
</TABLE>
<PAGE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997 1996
-------- -------
(Unaudited)
($ in thousands)
<S> <C> <C>
Balance, beginning of year....................... $ 3,332 $ 3,510
Provision for loan losses........................ 4,645 2,841
Loans charged-off................................ (3,943) (1,187)
Recoveries....................................... 288 146
-------- -------
Balance, end of period........................... $ 4,322 $ 5,310
======== =======
</TABLE>
15
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments to developers providing end loans
The Company has outstanding commitments for the origination of
permanent loans for various projects in the process of completion. Total
commitments amounted to approximately $410.0 million at September 30, 1997. All
commitments are subject to prevailing market prices at time of closing with no
market risk exposure against the Company or with firm back-to-back commitments
extended in favor of the mortgagee.
Loans in process
Loans in process pending final approval and/or closing amount to
approximately $94.6 million at September 30, 1997.
Commitments to buy and sell GNMA certificates
As of September 30, 1997, the Company had open commitments to issue
GNMA certificates of approximately $98.1 million.
Commitments to sell mortgage loans
As of September 30, 1997 the Company had commitments to sell mortgage
loans to third party investors amounting to $71.4 million.
Lease commitments
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
Other
At September 30, 1997, the Company is liable under limited recourse
provisions resulting from the sale of loans to several investors, principally
FHLMC. The principal balance of these loans, which are serviced by the Company,
amount to approximately $271.7 million at September 30, 1997. Liability, if any,
under the recourse provisions at September 30, 1997 is estimated by management
to be insignificant.
16
<PAGE>
In July 1997 the Government of Puerto Rico amended the tax law that
provided tax exemption on interest income generated by FHA and VA loans secured
by real estate property located in Puerto Rico and mortgage backed securities
secured by such mortgage loans (GNMA's). Under the amended law, FHA and VA loans
closed prior to August 1, 1997 will continue to be exempt. The interst income on
FHA and VA mortgage loans originated on or after August 1, 1997 for purposes
other than to finance the acquisition of new housing, and GNMA's secured by such
loans, will no longer be exempt, and will be taxed at a preferential 17% tax
rate to individuals and certain other taxpayers other than corporations. FHA and
VA loans to finanace the purchase of new housing, and GNMA's secured by such
loans, will continue to be exempt. While the Company has benefited from the
previously available tax exemption, management believes based on currently
available information that the changes to the Puerto Rico Tax Law should not
have a significant adverse effect on the results of operations of the Company.
Item 2: Management's Discussion and Analysis
Financial Condition
At September 30, 1997, the Company's total assets amounted to $1.4
billion, as compared to $1.0 billion at December 31, 1996. The $384.9 million or
37.1% increase in total assets during the nine month period ended September 30,
1997 was primarily attributable to a $88.3 million or 14.6% increase in loans
receivable, net, which reflects net originations following repayments and sales,
a $214.6 million or 198.4% increase in mortgage-backed securities held for
trading, and a $57.7 million or 106.0% increase in mortgage loans held for sale,
reflecting an increase in the volume of loan originations of approximately 53%
from $426.3 million to $654.0 million during the 1997 period as the Company
continues to increse its market position in Puerto Rico. The Company also
experienced a $38.5 million or 124.2% increase in investment securities
available for sale, principally due to the purchase of approximately $60.5
million of U.S. Treasury and government agency securities during the nine month
period ended September 30, 1997, reduced by maturities and sales of
approximately $23.5 million. Such increases were partially offset by a $23.4
million or 21.5% decrease in cash and cash equivalents.
The increase in the Company's assets was funded primarily by increased
deposits of $86.9 million or 14.1%, a $235.2 million or 241.4% increase in
securities sold under agreements to repurchase, a $29.8 million or 23.5%
increase in notes payable, and a $27.2 million or 181.3% increase in FHLB
advances.
At September 30, 1997, the Company's stockholders' equity amounted to
$131.1 million, which is an increase of $15.5 million or 13.4% from the amount
reported at December 31, 1996. The primary reason for the increase was the net
income earned during the nine month period ended September 30, 1997, which was
partially offset by $1.7 million of dividends paid during such period. At
September 30, 1997, the Bank's leverage and Tier 1 risk-based capital amounted
to 7.29% and 12.48% of adjusted total assets, respectively, compared to a 4.0%
minimum requirement, and its total risk-based capital amounted to 13.27% of
total risk-based assets, compared to an 8.0% minimum requirement.
In September 1997 a new wholly-owned subsidiary of R&G Mortage was
organized. Such subsidiary is primarily engaged in the origination of sub-prime
mortgage loans on residential real estate.
17
<PAGE>
Results of Operations
The Company reported net income of $6.1 million and $16.5 million
during the three and nine month periods ended September 30, 1997, respectively,
as compared to $2.5 million and $8.6 million during the prior comparable
periods. The significant increase in net income during the three and nine month
periods in 1997 over the comparable 1996 periods, of $3.6 million or 145.3% and
$7.9 million or 92.3%, respectively, takes into consideration a one-time $2.5
million assessment ($1.6 million net of income taxes) in September 1996 as a
result of federal legislation to recapitalize the Savings Association Insurance
Fund (SAIF) administered by the FDIC.
Total revenues for the nine month period ended September 30, 1997
amounted to $47.5 million, a $8.1 million or 20.5% increase over the comparable
1996 period. The increase in revenues during the nine month period ended
September 30, 1997 was primarily attributable to a $5.2 million or 65.6%
increase in net gain on origination and sale of loans as the Company experiences
a significant increase in unrealized profit on trading securities which is
associated with an increase in the market value of GNMA certificates held by the
Company and an increase in the volume of mortgage loans originated and
securitized. Also the Company had a $5.2 million or 24.6% increase in net
interest income, as the Bank earned a significantly increased amount of interest
income on its loan and investment portfolios, and a $556,000 or 19.0% increase
in service charges, fees, and other due to increased fees on deposit accounts
and new deposit products and services. The increase in net interest income was
partially offset by $1.8 million increase in the provision for loan losses.
The increase in the provision for loan losses was taken both due to a
$88.3 million or 14.6% increase in the Company's loan portfolio during the 1997
period as well as to increased net charge-offs experienced by the Company
associated primarily with consumer loans. Net charge-offs totalled approximately
$3.6 million during the nine month period ended September 30, 1997. During the
first quarter of 1997, the Company increased the loss factors which are
associated with reserving for each of the loan categories in its portfolio. The
Company's actions reflect increased bankruptcies and resulting delinquencies
experienced by lenders in Puerto Rico generally, including the Company. During
the second quarter of 1997, management adopted more stringent consumer
underwriting procedures to address problems experienced generally in the market
for personal loans, and has determined to increase collateralized consumer
lending instead of personal loans.
The increase in revenues for the nine month period ended September 30,
1997 was also partially offset by a $273,000 or 83.0% decrease in net gains on
sales of investments available for sale, and a change of $945,000 in net profit
(loss) on trading account from a $ 201,000 profit in the comparable 1996 period
to a $744,000 loss during the nine month period ended September 30, 1997. The
Company records in its trading account gains and losses resulting from options
and futures contracts primarily designated as hedges against fluctuations in the
interest rates of specifically identified assets or liabilities. The loss
experienced is primarily related to an increase in hedging activities as well as
increased volatility in market interest rates during 1997.
18
<PAGE>
Total revenues for the quarter ended September 30, 1997 amounted to
$16.4 million, a $2.7 million or 19.6% increase over the comparable quarter in
1996. The increase in total revenues during the 1997 quarter was primarily
attributable to a $2.8 million or 53.0% increase in net interest income after
the provision for loan losses.
Total operating expenses decreased by $2.0 million or 20.0% and by $1.5
million or 5.8% during the three and nine month periods ended September 30, 1997
over the comparable 1996 periods, which take into consideration the one-time
$2.5 million ($1.6 million net of income taxes) SAIF assessment. Without the
assessment, total expenses would have increased by $502,000 or 6.7% and by $1.0
million or 4.5% during the same respective periods. Without considering the SAIF
assessment, the increase during the nine month period in 1997 occurred
notwithstanding a $477,000 or 16.0% and a $524,000 or 6.4% reduction in employee
compensation and benefits. Occupancy expenses increased $739,000 or 63.5% and
$1.5 million or 36.1% during the three and nine month periods ended September
30, 1997, due principally to the operation during the full period in 1997 of the
Company's new data processing center, as well as increased costs associated with
the opening of a new branch location and the completion of remodelling work at
six branches acquired in prior years from another financial institution in
Puerto Rico. Other miscellaneous expenses increased by $240,000 or 7.1% and
$89,000 or .8% during the same respective periods.
Total income tax expense increased by $1.1 million or 91.3% and $2.1
million or 41.0% during the three and nine month periods ended September 30,
1997, respectivively, over the prior comparable periods, due primarily to a $4.7
million or 127.3% and a $10.0 million or 73.3% increase in income before taxes
during the three and nine month periods ended September 30, 1997, respectively.
The Company's effective tax rate amounted to 28.0% and 30.2% during the three
and nine month periods ended September 30, 1997, compared to 33.2% and 37.1%
during the same comparable 1996 periods. The decrease in 1997 of the Company's
effective tax rate was primarily attributable to an increase in the Company's
exempt interest income.
Liquidity and Capital Resources
Liquidity - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The
19
<PAGE>
Company can minimize the cash required during the times of heavy loan demand by
modifying its credit policies or reducing its marketing efforts. Liquidity
demand caused by net reductions in deposits are usually caused by factors over
which the Company has limited control. The Company derives its liquidity from
both its assets and liabilities. Liquidity is derived from assets by receipt of
interest and principal payments and prepayments, by the ability to sell assets
at market prices and by utilizing unpledged assets as collateral for borrowings.
Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, advances from the FHLB of New York and other short
and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At September 30, 1997, the Company had $65.9 million in borrowing
capacity under unused warehouse lines of credit and $210.4 million in borrowing
capacity under advances agreements and a line of credit with the FHLB of New
York. The Company has generally not relied upon brokered deposits as a source of
liquidity, and does not anticipate a change in this practice in the foreseeable
future.
At September 30, 1997, the Company had outstanding commitments (mainly
unused lines of credit) to originate non-mortgage loans of $8.6 million.
Certificates of deposit which are scheduled to mature within one year totaled
$369.5 million at September 30, 1997, and borrowings that are scheduled to
mature within the same period amounted to $447.4 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments.
Capital Resources - The FDIC's capital regulations establish a
minimum 3.0 % Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier 1 leverage ratio for such other banks
from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders'equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets,
20
<PAGE>
plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset or
item. The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage capital standard. The components of supplementary capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At September 30, 1997,
the Bank met each of its capital requirements, with Tier 1 leverage capital,
Tier 1 risk-based capital and total risk-based capital ratios of 7.29%, 12.48%,
and 13.27%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
Inflation and Changing Prices
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
27 Financial Data Schedule E-1
b) No Form 8-K reports were filed during the quarter.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: November 10, 1997 By: /S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman of the Board
and Chief Executive Officer
By: /S/ JOSEPH R. SANDOVAL
----------------------
Joseph R. Sandoval
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,385,403
<INT-BEARING-DEPOSITS> 58,060,492
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<INCOME-PRETAX> 23,587,795
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<NET-INCOME> 16,463,726
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